Law of Marketing & Antitrust
Every company must market their products to make a profit; however, the allowable methods of marketing are limited. The United States and other market economies are committed to the principle of competition because it protects consumers, encourages efficiency and innovation in producers, and maximizes overall wealth. Society, in the form of the antitrust law, has announced its strong policy against monopolies, cartels, and other arrangements that threaten competition. The company seeking to market its products is well advised to steer clear of any practices that hamper competition. Excessive market power, tying agreements, and cartel violations can all attract the attention of government regulators seeking to enforce antitrust law. This article reviews these concepts and the criminal penalties for violation of the antitrust law.
Keywords Antitrust; Bid rigging; Cartel; Clayton Act; Competition; Customer allocation; Market power; Monopoly; Sherman Act; Tying agreement
Marketing: Law of Marketing
All businesses operate by offering some good or service within some market. The basic forces that drive those markets economies are supply, demand, and competition. Market economies are dedicated to the principle that people are in the best position when they can make voluntary exchanges of goods and services at prices controlled by competitive markets. When exchanges are made in competitive markets, society will be better off because markets remain open and output can expand, thereby maximizing national wealth. Antitrust laws are designed to control private economic power by preventing monopolies, punishing cartels, and otherwise ensuring competitive markets. A market is competitive if goods are priced at the cost of production giving sellers and producers enough profit to maintain their investment in the industry and if all consumers willing to pay that price are able to purchase those goods (Hovenkamp, 1985).
As an economic model, a perfectly competitive market is characterized by the existence of several factors. First, sellers would produce identical products such that consumers are indifferent regarding which supplier they buy from. Second, each supplier is so small as compared to the overall market that fluctuations in their output, or their withdrawal from the market, would not affect the decisions of other sellers. Third, all sellers would have the same access to the material required to produce their goods. Fourth, all participants in the market would have perfect knowledge about prices, output, and other market information. The closer a market comes to meeting all of the four standards, the more competitively that market will perform (Hovenkamp, 1985).
A monopoly is essentially the opposite of perfect competition. Monopolies seek to maximize profits through substantial or total market power and restrict output in a way that limits supply and causes prices to rise. This practice reduces overall production and likely relieves the producer from competitive market pressures to be innovative and efficient. Monopoly markets are characterized by three factors. First, a single seller occupies the entire market. Second, that dominant seller sells a unique product. Third, there are substantial barriers to entry for other firms and exiting the market is also difficult. This third factor is likely the most important to monopolistic behavior. Without such barriers, other firms would be likely to enter the market when the monopolist raises prices or lowers quality from the competitive norm (Hovenkamp, 1985).
The Development of Antitrust Law
The law has developed over the years in order to protect markets from monopolies and anti-competitive behavior. Courts in England, dating back to 1414, sought to protect fair commercial activity by declaring void clauses in agreements between master and apprentice whereby the apprentice was prevented from entering the trade for a certain period of time or in a given location. Courts were, and are, hesitant to deprive a person of the ability to use their skills to earn a living and to deprive the public of the advantages of competition. However, the principle of freedom of contract held that people should be able to make agreements and courts should enforce those freely entered agreements without dictating how a person can or should dispose of the property or effort. The competing principles of market regulation and freedom of contract came to a head in the famous English case of Mitchell v. Reynolds in 1711. The case laid down the doctrinal principles to determine the enforceability of a restraint on trade. General restraints on trade were invalid because their only purpose was to limit competition. Society was justified in intervening in an agreement in order to protect a person who agreed to such a general restraint before the person became a burden to the state or deprived the public of the benefits of competition. Particular or specific restraints may be valid if they are limited in duration and scope and otherwise reasonable. The common law view was that the public was protected if the legal right to trade was guaranteed.
The inadequacy of the safeguard provided by the common law became apparent in the railroad industry where high capital expenditures to enter the market made competition sparse, even though all potentially interested parties had a legal right to enter the market. The concern was that a railroad could inflate rates on routes where it enjoyed a monopoly and then unfairly cut rates on competitive routes. In the United States, during the second half of the ninetieth century, rising public concern about the abusive practices of railroads and corporate giants led to antitrust legislation. Congress first responded with the Interstate Commerce Act and the Sherman Antitrust Act, both passed in 1890. The Sherman Act enjoyed overwhelming support and passed in Congress with only one vote cast against the measure. However, continuing corporate abuse along with disappointing judicial interpretation of the acts fueled continued public pressure for additional regulation. The antitrust issue dominated the 1912 presidential election and led to the Clayton Act and the Federal Trade Commission Act of 1914.
The operative provisions of Sherman Antitrust Act of 1890 are few and brief. Section 1 of the Sherman Act declares illegal all contracts, combinations, or conspiracies that unreasonably restrain interstate or foreign trade. The act applies to agreements among competitors that attempt to fix prices, rig bids, and allocate customers. Section 2 of the act declared illegal any monopoly or attempt to monopolize any part of trade. The violation of either section is punishable as a criminal felony. The Sherman Act did not create authority for active regulation of business. On the other hand, the general prohibition on monopolies and restraints of trade was more restrictive than the common law approach that only refused to enforce offensive contracts. The main effect of the Sherman Act was to bring the enforcement of antitrust law within the executive branch of government. The initial judicial reaction was to give the Sherman Act a very narrow reading followed by a very broad reading that made it unworkable. Eventually, the courts settled on the "rule of reason" and condemned only unreasonable conduct under the act (Hovenkamp, 1985).
Under the "rule of reason" businesses had little guidance as to what was illegal and courts had no specific mandate to enforce. To provide some guidance, in 1914 Congress passed the Clayton Act, which declared four restrictive or monopolistic activities against the law but not criminal offenses: Price discrimination (selling the same product at different prices to similar buyers); exclusive dealing contracts (selling on the condition that the buyer would not deal with seller’s competition); corporate mergers (acquisition of competing companies), and interlocking directors (common board members among competing companies). Each of these practices was illegal only when their effect was to considerably lessen competition or when they tended to create a monopoly in any line of commerce. The Federal Trade Commission Act of 1914, as amended in 1938, declared unlawful unfair methods of competition and deceptive trade acts (Hovenkamp, 1985).
The application of the antitrust law, for example section 2 of the Sherman Act, requires the finding that a company has monopolistic power. As a general matter, courts describe market power as the ability to raise prices or eliminate competition. When a...
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